MMM undervalued?

Take a look at the charts. Nothing much has been going on for the past 2 years and the share price has been hovering. Right now, it is at a share price of around $78.

Is it a possible undervaluation. Possibly?

According to moneycentral, it has a a net profit growth of 22.4% compared to 12.5% for the industry. Also 5 year average profit margins are greater than the average of the industry which is 10.5%.Its earnings per share has been growing from $3.83 to $5.16 from fiscal year 2004 to fiscal year 2006.And it is trading at a PE of 15.3 compared with the industry norm which is 18.4.

Other financials include:

Book Value/ Share Debt/ Equity Return on Equity (%) Return on Assets (%) Interest Coverage
12/06 $13.56 0.36 38.7 18.1 46.7
12/05 $13.78 0.23 30.3 15.3 59.2
12/04 $13.42 0.27 27.4 13.7 62.7
12/03 $10.06 0.37 30.5 13.7 44.2
12/02 $7.68 0.56 32.9 12.9 38.1
12/01 $7.78 0.48 23.5 9.8 18.3
12/00 $8.24 0.43 28.4 12.8 27.5
12/99 $7.89 0.42 28.0 12.7 27.1
12/98 $7.38 0.52 20.4 8.6 14.7
12/97 $7.32 0.42 35.8 16.0 28.5

As you can see book value has been growing steadily which is indicative of good management.

On top of that, gurus have also bought it. Hence, is it undervalued? We leave that to you to decide!!!

Dell Inc

Dell has been beaten down pretty badly in recent times. This proves to be an exciting opportunity for investors as it may be of value to certain groups of investors.

Its current share price is $25 and it once traded as high as $43 in '05.

Without doing any form of DCF calculation, Michael Dell bought 70 million dollars worth of Dell's shares in the open market at a price of $23.99. You can verify this by looking at www.secform4.com . This serves as an indicator that this chap is confident that it is undervalued.

Other indicators of it being undervalued is when investing geniuses buy it as well. The gurus who bought it include Ron Baron, Charles Brandes, Richard Pzena and more.

With the slew of corporate actions taking place in Dell possibly serving as catalyst for a up shoot in the stock price, Dell is definitely worth taking a closer look at.

Trading at a PE ratio of 18.79 and with current earnings per share at 1.46 for 2006. Projecting eps to grow at an approximate rate of 10% a year which is lower than the annual compounded growth of 22% a year, Dell might be trading at a price of $44.18 in 5 years. Please bear in mind that this is just preliminary analysis. With Dell's decreasing moat due to competition from Hewlett Packard, one can forsee a slight decrease in intrinsic value too. If Dell does trade at 44.18 in 5 years time, that's a Compounded annual growth rate of 13% a year.

Undervaluation in apollo group (apol)

Apollo group is a company that provides online education. Its business models have been very successful and it is even the owner of the University of Phoenix and a host of other universities. Through, these platforms, apollo hopes to deliver top notch education through the internet.

Having been beaten down after disaapointing the analysts, it has dropped from a high of about $95 to approximately $48 right now. Furthermore, it is trading at a PE ratio of 20.11.

Being a growth company, some reknowned investors think that is is undervalued. Some of the investors that think it is undervalued include Ron Baron, Charles De Valux, David Dreman, Wallace Weitz & Ruane Cunniff.

A quick and dirty way of valuing the company is by looking at companies within similar industries and a company similar to Apollo is Strayer education. Strayer is also an online university on its own and trades at a PE ratio of 34.6.

Comparing a PE ratio of 20.11 of apollo to Strayer's 34.6, apollo group seems to me an undevalued entity that is worth a closer look.

Clear Channel Arbitrage

Clear Channel's main businesses are Radio Broadcasting,International Outdoor Advertising and Americas Outdoor Advertising.The Radio Broadcasting division owns over 1176 domestic radio stations,51 television stations and a national radio network.The Company has a strong presence internationally in countries as far as Singapore and UK.


Current Price:$35.96
Price to Book Value:2.26
Price to Free Cash Flow:22.54
Price to Sales:2.52
5 year ROE per share Average:7.31%

What makes this interesting is that there is an arbitrage opportunity here.Management had agreed to a buyout by private equity firm Bain Capital and Thomas H.Lee Partners but soon after its two largest shareholders expressed disappointment with the $37.60 in cash per share.This forced the private equity firms to revise their offer to $39 in cash per share.

According to the company website, " Clear Channel Communications, Inc. (NYSE: CCU) today announced that it has entered into an amendment to its previously announced merger agreement with a private equity group co-led by Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P., providing for an increase to $39.00 per share in the price shareholders will receive in cash for each share of Clear Channel common stock they hold. This is an increase from the previous price of $37.60 per share in cash"

Now, what will be the return on this ? Suppose you buy the stock at its current trading price ($35.96),you stand to receive $39 in cash for every share you owned

Realised Return=39-35.96/35.96
=8.45%

Not a bad return for a short term arbitrage opportunity!

Buffett’s purchase of Burlington Northern Santa Fe (BNI)

Recently, according to Sec filings, buffet purchased a wonderful company called Burlington Northern Santa Fe ticker symbol BNI.

For perspectives on the company, visit:

http://www.gurufocus.com/news.php?id=5386

http://www.gurufocus.com/news.php?id=5252

Signs that stocks are undervalued!

Investing is not all that difficult. What all investors need is a sound valuation technology, information surrounding the company of concern and the corporate actions of others.

Typically, one example that a stock is undervalued is when you see the insiders buying shares. You don't want to just see one insider buying shares in the open market. You want to see a significant level of purchases. You want to see purchases from the heavy weights of the company, namely the ceo, cfo & chairman of the company. For more regarding insider trading, you can read my previous posts on it(jan 15 monday 2007)http://valueinvestorhaven.blogspot.com/2007_01_01_archive.html

And for insider trading resources, one can use www.secform4.com , www.form4oracle.com or www.sec.gov and access form 4 filings of the company's insiders.

Another powerful indicator that a stock is undervalued is when investor greats are buying the shares of the company. If both the insiders and investing geniuses are buying up the company, it means there is a possible consensus that both the insiders and these investing geniuses agree that the stock is undervalued. Furthermore, if the investor is a value investor, one can assume to a certain extent(caveat emptor) that a sound valuation technology has already been applied to valuation of the company. In addition to that, one can investigate the investing genius further to find out if the investor conducts any form of inquiry with management. This will help boost one's confidence.

The last powerful indicator which can help an investor identify an undervalued stock is when the company is buying back its own shares in the open market. When a company buys back its shares in the open market, it not only means that the company is undervalued. Also, it serves as a sign that the company's executives are interested in increasing the wealth of its current shareholders. For example, if company A had 10 shares and $10 in earnings.Each share will garner $1 in earnings. Lets say the company buys back 5 shares. It then only has 5 shares left in the. With $10 in earnings, each share now gets $2. And the shareholders get richer and richer. So often times, a company buying back its stock not only a powerful indicator but also a catalyst.

A very recent example is Coca Cola (ticker KO). The company had a share buyback scheme and also its insiders and several gurus were buying the stock. Then, its share price was around $44. Now it is $51.75 and i believe it is worth quite a bit more. Herb Allen, a businessman with a privately held investment firm also bought into coke's shares. On top of that, Warren buffet still owns a huge stake in the company. With its growing moat and earnings projected, it isn't to hard to imagine then that coke was undervalued. A Wonderful company at a reasonable price!

Point 360 Spin Off

Company overview

Point.360 is a full-service audio-visual asset management company. It has a 30 year track record of providing media services and offers services such as "telecine, HDTV services, encoding, duplication, distribution and asset tracking for commercials, promotional spots and long-form programming".

The Company is expanding its service reach to include "the management and enhancement of digital formats, utilizing technologies for storage, digital asset management, transmission, access, streaming and viewing"

Current Price:$5.50

Book value per share:$4.30
Price to Cash flow ratio:8.83

LT Debt % of Total Capital: 8%
4 yr average ROE:5.20%
4 yr average Net Margin:2.77

The business has poor fundamentals and may not be an ideal investment.The profit margins are razor thin and 4 yr average ROE is abysmal.Still, there is something interesting to look at its lastest SEC filing .Recently, it has agreed to merge with DG FastChannel Inc.(NDAQ:DGFC). Under " the terms of the agreement, DGFC will acquire Point.360's spot advertising distribution business, and Point.360 will spin off its remaining businesses to its shareholder". Senior management plans to remain on board the spin off, which is clearly a good sign that management is confident about the long term prospect of the company.The spin offf is expected to "generate revenues of about $45 million to $50 million with EBITDA around $4 million to $6 million during the next 12 months".Lastly,shareholders of Point 360 will receive a cash payment(not yet disclosed) from DGFC and shares in the spin off.

Clearly,this is an interesting play and warrants closer inspection as spin offs tend to perform well after coming out of their parent companies.

Standing on the shoulders of greats!

Dear people,

for those who are newbies to investing or rather value investing in particular, one should contemplate 'standing on the shoulders of giants' in Albert Einstein's own words. In effect, it applies not just to science but to also investing. In fact, there is a system or a way or method to follow the great investors of our time.

The next question that one may ask is even if we did follow these investor greats, wouldn`t we be late to the party? My answer to that is "No". Value investing in fact entails an investor holding undervalued stocks with an outlook of 2 to 5 years for the undervalued price and intrinsic value to narrow. Value investors are also not market timers. Even if one was indeed late to the party, one could still get the undervalued security at a price better than what the Investing geniuses got. For example, Warren Buffet did did buy into Anheuser Busch at around $46 - $48. From there we could concur that at such a price range , Anheuser Busch was indeed undervalued. Hence, one can keep a close lookout for the stock from there after it is reported in the filings. In actual fact, the stock did fall to $44. So there you go! If you had scooped the stocks up at $44, you would have gotten it at a better price than Warren Buffet the genius himself. Today, Anheuser Busch sells for $52.14 half a year later, a decent return of 18.5%.

Now, where shall we get such information one may ask. One can simply get it from a website filings called www.gurufocus.com or from the SEC filings of these Investor greats.

Please bear in mind that coatailing in fact is just the starting point of narrowing down your selection of stocks. From looking at what the greats buy, one can select a portfolio of 8-10 stocks that he/she is comfortable with and that can beat the market.

The list of gurus that investors could aim to coatail are:


Warren Buffett
Wallace Weitz
Tweedy Browne
Tom Gayner
Seth Klarman
Ruane Cunniff
Ronald Muhlenkamp
Ron Baron
Robert Rodriguez
Robert Olstein
Richard Aster Jr
Michael Price
Mason Hawkins
Martin Whitman
John Keeley
Joel Greenblatt
Ian Cumming
Glenn Greenberg
George Soros
Edward Owens
Edward Lampert
Dodge & Cox
David Swensen
David Dreman
Charles de Vaulx
Charles Brandes
Bruce Sherman
Bruce Berkowitz
Brian Rogers
Bill Nygren
Bill Miller
Arnold Van Den Berg

Value in spin offs!

Value, in the traditional sense as laid down by Graham focuses on the assets of the company. The idea was, if one did buy a company's shares at 2/3 the net current asset value, one was not only assured a margin of safety but one could also realise a potential price appreciation to book value.

Sir Warren Buffet went on to tweak what was conventionally thought of as value. You could sum up buffet's approach in a few words: "Good business at a fair price"

As it is, these 2 approaches in my opinion are used by so many investors in the states that it may be so hard to obtain really deep value with these 2 approaches. Just to illustrate, in the past, when buffet bought into washinton post, he realised the value was 4 times the price he was buying. These days, it is very hard to find such rare gems as because valu investors will buy stocks which have a 40% margin of safety. Also, ben graham stocks are nearly inexistent in the US now and it sure is a rarity. However, this is not to say that Ben Graham or Warren Buffet type stocks no longer yield sufficient return but rather returns in these methodologies are much less as in the past.

That being said, what i am truly trying to say is, if one wants to search for value, one has to in most cases a complete contrarian and example of such a prominent investor is Joel Greenblatt. Let me tell you, this chap, is a brilliant investor and more or less unconventional in every sense of the word.

His particular focus is spinoffs. Spinoffs are actually divisions within a company that are launched as a separate public listed entity. And management spins off other divisions within the company as they want to unlock the value inherent in the spin off.

Preliminary research on my part shows that spin offs can be rather attractive. For one, shares of spin offs are normally discarded by investors as for some reason, institutions were never interested in the shares of the spinoffs as these spinoffs may be too small for their consideration. As a result, the shares of spin offs are normally depresses creating a 'temporary' bargain price. It is not just the institutions that discards the shares. Investors in parent companies who are sometimes given shares in the spinoff would rather discard it as they do not have the inclination nor the time to do the research necessary to justify these spin offs as value plays. Lastly, in my opinion, spin offs are an area still relatively untouched by value investors. The conventional plays are the buffet types companies and spin offs are seldom buffet type companies and hence in my humble opinion, provides situations which can result in a larger than normal return.

Taking a look at some examples:

1)1 year from the spin off of GNW(genworth) from GE, its price rose 50%

2)1 year from spin off of moneygram, moneygram's share price rose 21%

3)1 year from the spin off of Freescale, it share price rose 20%

4)1 year from the spin off of Hospira, its share price rose 15%

If these examples are not enough to convince you, read on for more posts!!!




Lucas